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Lahti University of Applied SciencesDegree Programme in International Business
BLANCO, TUIRE & STEFANOV, ILIA Supply chain strategy as part ofcustomer satisfaction
Case: S-Market Metskangas
Thesis, 112 pages, 5 appendices
Autumn 2006
ABSTRACT
This thesis deals with the supply chain management in the grocery retail businessand the output of logistics processes-the customer service. The case study is about
S-Market Metskangas value chain and its performance from the customerperspective. The aim of the study was to clarify how the supply chain of S-MarketMetskangas affects its customers satisfaction. For that reason a profoundobservation of the logistics activities and parties involved in the logistics chainwas needed and in addition to that a study about the customers perceptions of thestore performance had to be carried out.
The character of our study demanded sufficient knowledge of three topics: supplychain management, customer service and satisfaction, and research methods.Literature dealing with all these issues was acquired in order to understand howwe could incorporate and link more effectively the evaluation of customer
satisfaction and the impact of the supply chain activities on it, during the variousstages.
Data for the first part of the empirical study was acquired by interviews andobservation on different levels of the supply chain of S-Market Metskangas. Therole of the three main parties involved in the grocery retail business of S-Market,the wholesaler Inex, the chain management of S-Hmenmaa and the retail outlet inMetskangas, was examined. The second part of the empirical section consisted oftwo customer satisfaction surveys. One was carried out in S-Market Metskangasand the other was mailed to the S-bonus card holders who lived in the area of
Metskangas. We collected altogether 454 responses from the both surveys.
The analysis of the results and the recommendations represented the third part ofour study. The study results indicate that the residents of Metskangas are satisfiedwith the shops performance and service level it offers. That means that the supplychain of S-Market Metskangas works at efficient level bringing benefits for bothits customers and the retail chain itself. The customers stated some wills regardingthe service counters, product assortment and others. Recommendations are madein order to improve the customer satisfaction concerning the above mentionedissues.
Key words: supply chain, customer service, grocery retail business, retail chain, S-Market Metskangas
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Lahden AmmattikorkeakouluDegree Programme in International Business
BLANCO, TUIRE & STEFANOV, ILIA Supply chain strategy as part ofcustomer satisfaction
Case: S-Market Metskangas
Opinnytety, 112 sivua, 5 liitett
Syksy 2006
TIIVISTELM
Tm opinnytety ksittelee toimitusketjun hallintaa pivittistavarakaupan alalla
ja logististen prosessien tulosta asiakaspalvelua. Tutkimuskohteena on S-MarketMetskankaan arvoketju ja sen suoriutuminen asiakkaiden nkkulmasta. Tyntarkoitus oli selvitt miten S-Market Metskankaan toimitusketju vaikuttaaasiakastyytyvisyyteen. Tt tarkoitusta varten logistiikan toimintojen jatoimitusketjuun kuuluvien osapuolten perusteellinen havainnointi oli tarpeen jalisksi oli toteutettava tutkimus kaupan suoriutumisesta asiakkaidennkkulmasta.
Tyn luonteen vuoksi tarvittiin tarpeeksi tietoja seuraavista aiheista:toimitusketjun hallinta, asiakaspalvelu ja asiakastyytyvisyys ja tutkimusmenetelmt. Kaikista nist aiheista oli hankittava kirjallisuutta, jotta
ymmrtisimme miten voisimme paremmin yhdist asiakastyytyvisyysarvioinnin ja sen vaikutuksen toimitusketjun hallintaan ja eri toimintoihin.
Empiirisen tutkimuksen ensimmisen osan tiedot saatiin haastattelujen avulla ja S-Market Metskankaan toimitusketjun toimintoja havainnoimalla. Kolmentrkeimmn S-Market Metskankaan toimitusketjuun kuuluvan osapuolen,tukkuliike Inex, ketjun ohjaus S-Hmeenmaa ja liike itse, rooli toimitusketjussaselvitettiin. Empiirisen tutkimuksen toisen osa koostui kahdestaasiakastyytyvisyyskyselyst. Kyselyist toinen toteutettiin myymlss ja toinenpostitettiin S-ryhmn Metskankaan alueen kanta-asiakkaille. Vastauksien mr
oli yhteens 454.
Tulosten analyysit ja suositukset muodostivat opinnytetymme kolmannen osan.Tulokset osoittivat, ett S-Market Metskankaan asiakkaat olivat tyytyvisimyymln suoritus- ja palvelutasoon. Tm puolestaan osoittaa, ett S-MarketMetskankaan toimitusketju toimii tehokkaasti, tuottaen hytyj sek kaupanasiakkaille ett ketjulle itselleen. Asiakkailla oli toiveita liittyen muun muassapalvelutiskeihin ja tuotevalikoimaan. Suositukset perustuvatasiakastyytyvisyyden parantamiseen edell mainituissa asioissa.
Asiasanat: toimitusketju, asiakaspalvelu, pivittistavarakaupan ala,vhittiskauppaketju, S-Market Metskangas
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TABLE OF CONTENTS
1. INTRODUCTION 1
1.1 The purpose of the study..1
1.2 Methodology2
1.3 Structure and limitations..3
2. SUPPLY CHAIN MANAGEMENT IN GENERAL .4
2.1 Introduction to supply chain management...4
2.2 Inventory control and warehousing and storage . 9
2.3 Material handling and packaging...14
2.4 Procurement and order processing.....17
2.5 Traffic and transportation..20
2.6 Demand forecasting22
2.7 Facility site selection..25
2.8 Salvage and scrap disposal and return goods handling..26
2.9Distribution communications and parts and service support.27
2.10 Customer service and satisfaction- output of logistics activities.28
3. FINNISH GROCERY INDUSTRY...32
3.1Grocery retail market in Finland...32
3.1.1 Kesko Food Ltd...42
3.1.2 Tradeka44
3.1.3 Lidl......45
3.2 Main characteristics and special features of the grocery supply chain in
Finland46
3.2.1 General issues..46
3.2.2 Distribution process.49
3.2.3 The inventory and storage...51
3.2.4 Order processing and information technology52
3.2.5 Demand forecasting.55
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3.2.6 Reverse logistics and packaging..56
3.2.7 Stores logistics...58
3.3 Customer service59
3.3.1 Definition of good customer service...59
3.3.2 Customer service in grocery stores.60
3.4 ECR- a customer driven strategy of grocery stores...61
3.4.1 General review.61
3.4.2 Consumer behaviour - part of ECR-strategy...64
4. ORGANISATION STRUCTURE OF S-GROUP.........66
4.1 S-Group in general.664.2 Inex in general70
4.3 S-Market in general71
5. SUPPLY CHAIN OF S-MARKET METSKANGAS........73
5.1 The role of S-Hmeenmaa and SOK in the supply chain .73
5.2 The role of Inex in the supply chain description of logistics
activities..755.3 S-Market Metskangas 79
5.3.1.General review79
5.3.2 Supply chain and internal activities of S-Market
Metskangas.81
6. S-MARKET METSKANGAS CUSTOMER SATISFACTION
RESEARCH...866.1 Questionnaire design..86
6.2 Conduct of the survey ...88
6.3 Sample size and response rate92
6.4 Analysis of the results....93
7. RECOMMENDATIONS FOR S-MARKET METSKANGAS
OPERATIONS...99
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8. SUMMARY 105
REFERENCES
LIST OF APPENDICES
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1. INTRODUCTION
1.1The purpose of the study
The purpose of the study is to find out how the supply chain management and
logistics strategy decisions affect the customer service and satisfaction. Under
supply chain strategy we mean the three decision phases in the supply chain, the
supply chain design, planning and operations. Our goal is to explore the real issues
and factors that lie behind the success, the market share grow and cost-effective
operations of grocery stores and in particular S-market Metskangas. Since the
customer service is a result of a host of different but critically interrelated logisticsactivities we will describe every link from the supply chain, its interaction with the
other processes in the logistics and its impact on the customer service as well.
In order to have the whole picture of the successfully and profitably managed
supply chain it is important to consider the views of both retailers and consumers
and likewise their cooperation in improving the supply chain management. The
benefits from that cooperation are cut expenses for the retailers and lower pricesand better service for the customers, which increase the level of satisfaction
among the both parties.
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1.2 Methodology
Having chosen the topic of our study, the next step was to find the right literature
for building up the theoretical part and guiding us in the empirical section of the
study. In the beginning we chose about fifty books and graduation works from the
libraries in Lahti and other Finnish polytechnics databases. After reading, sorting
out and analyzing the useful information we ended up with thirty books which we
could place in the references. The thematic contents of the books, we used in the
study, covered three main issues: customer service and satisfaction, supply chain
management and research methods. Other sources of information needed for therealization of the study, consisted of articles published in the newspapers and
specialized magazines. As a last source of information for the project we used
articles from the Internet and other electronic databases.
Quantitative and qualitative research methods were used to fulfill the study. The
empirical part of the work consisted of S-market Metskngs supply chain
report (qualitative study) and customer satisfaction survey (quantitative). Thereport was fulfilled by observation of the above mentioned retail stores logistics
operations and interviews with the marketing manager of S- market Hmeenmaa,
the executive manager of S-market Metskngs and the logistics managerof
INEX. The level of satisfaction among the customers of S-market Metskngs
was measured with a quantitative survey. By using these research techniques we
could find out how the supply chain management affects the customer service and
satisfaction, with emphasis on the grocery retail business.
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1.3 Structure and limitations
As we were not allowed to measure the supply chain performance and the internal
logistics activities of S-Market Metskangas point of view, due to the high
competition in the grocery retail market and other confidential issues, we had to
put a limitation on our study. We decided to evaluate and measure the supply
chain performance of the store from the customers perspective. The questionnaire
was designed to the requirements of our contracting party, S-Hmenmaa, which
made a request for carrying out a customer satisfaction survey in the S-Marketsnewest outlet in Metskangas. They wanted us to explore the opinion of the local
residents and their perception about the store and to obtain more detailed
information about the demography and consumption behaviour of their customers.
We based our recommendations on the customers satisfaction survey with an
emphasis on the internal logistics performance of the store. Some issues in the
survey were skipped since they did not suit our objectives in the study. However,
these questions were of significant importance for the retail chain management ofS-Hmeenmaa and S-Market Metskangas.
The second chapter deals with the general view of the supply chain and each
process involved in it in order to give clear idea about activities and how their
management affect the customer service. Also it served us as a framework for
building up our conception of the grocery supply chain, we dealt in chapter three.
In the third chapter we observe the grocery retail market in Finland and focused onthe specific features and main characteristics of the supply chain of grocery stores.
In the same chapter we also describe the meaning of customer satisfaction and the
ECR, the efficient consumer response strategy, designed especially for the grocery
retail market. The chapters four and five consist of empirical findings and
comprehensive description of the supply chain of S-Market Metskangas and the
role and operations of the parties involved in it. In the chapter six we deal with the
customers satisfaction survey and the analysis of the result and recommendationsbased on the customers evaluation can be found out in chapter seven.
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2. SUPPLY CHAIN MANAGEMENT IN GENERAL
2.1 Introduction to supply chain management
A supply chain consists of the whole flow of goods, raw materials, capital and
information from manufacturer to end user and it also includes all parties involved
in the process, such as manufacturers, suppliers, transporters, warehouses, retailers
and customers. Customer service, marketing, operations, new product
development, distribution and finance are also included in the concept of supply
chain. (Lambert & Stock & Ellram 1998, 2-5.)
The main purpose for the supply chains existence is to fulfill customers needs
and requests and at the same time generate profits. According to many logistics
books the supply chain processes begin when a customer places an order and end
when satisfied customer has paid for the particular product or service. As a matter
of fact the supply chain concept is a much wider and spreads in both, vertical and
horizontal ways. When a customer need is defined it triggers the supply chain
activities which are trying to solve the existing problem-the satisfaction of thecustomer need. Then the processes are continuing with the search and finding of
the right manufacturers that can produce the needed product or service at the
lowest price without deteriorating its quality, go through the distributing channel
decisions and end not with the customers transaction, but with his satisfaction,
which in many cases is foreordained by the products endurance and operations. In
case of product defect or malfunction the same sequence of activities is starting
but in the opposite direction, known as reverse logistics. (Chopra&Meindl 2004,4-6)
The supply chain involves various stages. These supply chain stages consists of
customers, retailers, wholesalers/distributors, manufacturers and component/raw
material suppliers (Fig.1). The term supply chain means the movement of goods,
information and funds from suppliers to manufacturers to distributors to retailers
to customers along the chain and back. A simple supply chain may be formed onlyfrom one player in each stage. However, in reality it is more likely that each stage
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implies numerous parties. It might be that several suppliers provide a
manufacturer with raw material, who on the other hand supplies several
distributors with a particular product. It may occur that the process continues to
other manufacturer who needs this product for assembling the finished product
and then again is distributed to several wholesalers. The wholesalers may have as
a client a number of different retailer chains that serve different customers situated
in specific territory- a neighbourhood, a town, a district, or a country. At this way,
many supply chains actually represent a network system, which is not linear as it
can be seen from the figure below, but expands in two dimensions.
(Chopra&Meindl 2004, 5.)
Figure 1. Supply Chain Stages (Chopra & Meindl 2004, 5.)
Typical examples of expanded supply chain networks are the food industry
(grocery retail business) and automobile industry. In the food industry, for
instance, the manufacturing of margarine consists of several production stages,
from raw material selection (crops, oilseeds, fish oils and animal fats) through the
extracting and refining process to the production of the final goods-the refined oils
can be bottledand used as a food ingredient itself or further processing can be
performed in order to produce margarine or spreads, which can be used as a final
Manufacturer
supplier
supplier
supplier
Distributor Retailer Customer
Manufacturer
Manufacturer
Distributor Retailer Customer
Distributor Retailer Customer
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product but they might be used as an ingredient in many other products as well,
for example, breads, cakes and biscuits. The manufacturer and the supplier might
be different in every stage. The different raw materials can be provided by
different suppliers, different manufacturers can refine the different types of oil that
can be distributed to different margarine manufacturers who on the other hand are
distributing their products to different bakeries and so on. The same example
applies to automobile industry where different raw materials are provided for
manufacturing of different parts of the car, which later are distributed and
assembled in different assembling sites around the world.
The main objectiveof every supply chain is to maximize the overall generated valueor in another words profitability. The profit a supply chain generates can be
presented as a simple mathematical operation: the difference between the price
that customer pays for the product and all the efforts (time, money and labour
force) needed for its production. Supply chain profitabilitymeans the total profit
accumulated across all supply chain stages. The higher the supply chain
profitability, the more successful the supply chain is. It should not be forgotten
that the success of supply chain is measured in terms of profitability of the wholeintegrated logistics activities included in the supply chain, but on no account in
terms of profits at an individual stage. (Lambert& Stock 2001, 54-56.)
The appropriate management of cost generating flows in the supply chain,
information, product and funds, has a key importance for its success. The term
supply chain management involves the integration of the above mentioned flows,
their management and their coordination and supervision between and amongevery stage of the supply chain and between all the parties that have an affect on
it. Only thus the supply chains profitability can be maximized. (Chopra & Meindl
2004, 5-18.)
In order to be a prosperous supply chain, many important decisions are required to
be undertaken by its management. These decisions concern the flow of
information, product and funds, as well as the time and labour needed to keep thisflow going. The decisions also can be categorized according to the companys
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ambitions, how and to what extend it wants to gain a customer base and how it
wants to be perceived by the customers. The companys strategy reflects on its
supply chain strategy or design. There are three different phases or categories
concerning the decision making process of the supply chain: supply chain strategy
or design, supply chain planning and supply chain operation.(Chopra & Meindl
2004, 7.)
During the supply chain strategy (or design) phase, a company makes decisions
concerning the long term structure of their supply chain. The company should
determine the overall strategy of their supply chain, for example the company
should define the processes that each stage should perform and the allocation ofresources. Companys decisions about the supply chain strategy include the
location and production capacities of its manufacturers and warehousing facilities,
what products are manufactured or stored and in how many locations, the
transport modes to be used, and selection of information system. During this phase
the company should ensure that its objectives and supply chain design support
each others. Usually decisions regarding the supply chain strategy are made for the
long term, a period of at least 5-10 years, and it is extremely expensive to makechanges on them, especially when the company is running out of time. However,
the companies should take into consideration the possible changes in market
conditions and they should try to anticipate and predict, if possible, the factors of
uncertainty that may occur. (Chopra & Meindl 2004, 7-9.) (Ballou 1999. 31-36.)
Supply chain planning requires decisions that concern the companys activities for
a short period of time, usually from 3 to 12 months. Companies usually start thisparticular phase by estimating the demand in different markets for the following
year. During this phase the company should decide about their inventory policies,
marketing channels and distribution policies, and the schedule and the size of their
marketing campaigns. The company should also examine issues concerning the
uncertainty in demand, exchange rates, and competition over the pointed time.
The supply chain strategy creates borders within which the planning should be
done. It is possible that the planning policies may interfere or do not correspondwith the companys strategy. Therefore the flexibility of the supply chain design is
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of a great importance which can enable the companies to incorporate easier the
decisions taken during the planning stage to fit the companys strategy. The
forecasting process at this stage is facilitated by the fact that the decisions taken
cover a shorter period of time compared to the previous stage, which enables to
optimize the supply chain performance. The decisions of planning stage affects the
companies set of operating policies which companies are determining in order to
manage short-term operations- the next phase of the supply chain decision making
process. (Chopra & Meindl 2004, 7-9.) (Ballou 1999, 33.)
During the supply chain operation phase, the company makes decisions
regarding its individual customer orders. This is the last level of the supply chaindecision making process. At this level the supply chains strategy is fixed and the
planning policies are specified. The time frame used in this stage is quite short,
usually only from one day to one week. The objective of this stage is to find the
best possible way to handle the customer orders and other related daily operations,
to take advantage of the decrease of uncertainty and as a consequence to optimize
to maximum the performance. During this stage a company allocates inventory or
production to individual orders, sets due times of order fulfillment and deliveryschedules of its modes of transportation and place replenishment orders. (Chopra
& Meindl 2004, 7-9.)
All these three phases, concerning the building and managing of the supply chain, have
a great impact on the companies prosperity and well-being. All supply chain activities
are consolidated and managed according to the companys chosen policies during each
phase. The management and integration of these activities as well as other operationsregarding the supply chain and in particular the supply chain of grocery industry will
be examined next in our study.
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2.2 Inventory control and warehouse and storage management
Keeping inventory is a large and expensive investment. Therefore every company
has a strict view on issues concerning the inventory decisions and management.
There is no doubt that better management of the aggregate inventory that a
company keeps all over across the supply chain, will improve the cash flow and
increase return on investments. On the other hand an inappropriate management or
lack of inventory control will cause the customer service levels to drop. (Lambert
& Stock & Ellram 1998, 112-120.)
There are numerous reasons why companies keep inventory. Firstly, inventoryenables a company to achieve economies of scale in manufacturing, purchasing
and transportation. When producing a large quantity of products the plant
utilization is greater due to the long production runs and few line changes which
leads to reduction of manufacturing costs per unit. Large volume purchases helps
to save time and administrative costs in addition to the lower product price
negotiated in the contract. In transportation, costs are reduced because of the full
utilization of load space which effects in lower per unit shipping costs. (Lambert& Stock 2001, 228-243.)
Inventory is needed in the supply chain due to the fact that in many industries the
demand does not correspond to the supply and vice versa. The purpose is to assure
the product availability at time when a customer wants it. Keeping inventory acts
as protection from uncertainties and reduces the situations of stockout. In case of
variability in demand and in replenishment cycles a company can use the storedinventory in order to keep the level of customer service at the desired rate assuring
smooth flow of supply. (Lambert & Stock & Ellram 1998, 112,148.)
Inventory may represent a significant portion of a companys assets. Large product
quantities require large storage space which presumes the need of sufficient
warehouse facilities. In addition to that, some products inventory turnover is not
stable or it might be at inappropriate level which causes increase in the inventorycosts. Therefore, in case of excessive inventory levels the company profitability
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decreases. Out-of- pocket costs occurs with holding inventory. Insurance, taxes,
storage, obsolescence and damages increase, in addition to the out-of-pocket costs,
the value of the inventory and consequently decrease the companys profitability.
These inventory costs should be classified in order to achieve better transparence
on the issues that affect the companys profitability with regard to inventory
control. Inventory carrying costs usually are associated with the amount of
inventory stored and may represent one of the highest costs of the logistics. These
costs can be categorized into the following groups: capital costs, inventory
service costs, and inventory risk costs. Capital costs are connected to the money
tied up in products or bank loans used to finance the inventory levels and
handling. This capital could be used for other types of investments from where thecompany may acquire better figures and opportunities in terms of return on
investments or interest gained from other financial operations. (Lambert & Stock
& Ellram 1998, 148-152.)
The inventory service costs are accumulated from personal property taxes and fire
and theft insurance. Inventory risk costs consist of charges for obsolescence,
which can arise in cases when the product is going out of fashion, its life cycledeclines and it cannot be sold at regular price. Also product obsolescence may
occur in cases of damage incurred during shipping or at the warehouse, or
shrinkage from lost in weight or spillage, and relocation of inventory from one
place to another in order to avoid obsolescence and stockouts. ( Lambert & Stock
& Ellram 1998, 152-155.)
There are different types of inventory according to their location in the supplychain and the purpose they are used for. Depending on the place the inventory is
situated in the logistics chain it can be classified as supplier inventory, raw
materials inventory, in-process inventory, in-transit inventory, finished goods
inventory at plant, and finished goods inventory in field. (Lambert & Stock
2001, 230.)
The supplier inventory may consist of raw materials or ready products which areneeded in the further production processes. Raw materials inventory on the other
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hand might be accumulated in excess by the manufacturers, for example, in order
to support the production or if the management expect price increasing or
uncertainties in the supply. In- transit inventory represents the products or raw
materials that are en route from one place to another. Work-in-process inventory is
situated and used at the plant between manufacturing operations in order to avoid
production lines shutdowns in case of machinery break-downs. After the
manufacturing process is completed, the ready goods are placed in the storage
facilities waiting to be shipped to the destinations where they are needed. This
type inventory is called finished goods at plant inventory. Further on the inventory
is transformed into finished goods in field inventory; the goods are shipped to
public warehouses, distribution centers or straight to the shops with the goal toenable customer purchase, increase availability and serve as a customer
satisfaction level regulator. (Lambert & Stock 2001, 230.)
According to the purpose and the role the inventory performs, it can be
categorized as a cycle stock, safety or buffer stock, seasonal stock, dead stock and
speculative stock. Cycle stock is inventory formed from the replenishment of sold
or used in production goods and materials. This type inventory is used in caseswhen the demand and replenishment times are predictable and steady. Safety or
buffer inventory is held in excess when the variability of demand and other
conditions of uncertainty is high. Safety inventory is held as a buffer all over the
supply chain to support critical interfaces (usually situated away geographically
from each other) activities as supplier-purchasing, procurement-production,
production-marketing, marketing-distribution, distribution-intermediary and
intermediary-consumer/user operations. Seasonal inventory is used to balancethe supply and demand kept when the product demand and supply of raw
materials are changing and do not match during the year. (Lambert & Stock
2001, 232.)
Dead stock is formed from the products for which the demand has been decreased
with fast temps and high rates to the point that these products cannot be sold
anymore. In these cases transshipment to other locations is needed in order toavoid the penalties from the obsolescence. Speculative stock is gathered with the
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purpose to influence the price of some products and raw materials on the stock
exchange and the markets. This kind of inventory is not customer oriented but in
some cases might turn out to be profitable for some companies depending on the
line of business they operate in. (Lambert & Stock 2001, 235.)
The connection between inventory and warehousing is inevitable. Inventory has to
be stored safely all over the supply chain until it is required and the place the
storage mainly is happening is the warehouse. Another logistics process closely
related to warehousing is material handling. How the goods are unloaded and
moved across the warehouse, where they are placed and stored and how they are
loaded again to be shipped further. The warehouse is the link that connects themanufacturers and retailers. It also supports the reverse logistics by providing
temporally storage for products that are to be disposed or recycled.
The functions of the warehouse are to smooth the fluctuations between the
demand and supply by storing the flow of raw materials and finished goods in
order to avoid interruptions in productions. Also warehouse facilities ensure the
provision of goods at the seasonal demand and their storage at seasonal supply,and facilitate economic batch productions and economies of scale. Warehousing
activities add value to the goods by breaking bulk, sorting, consolidating,
blending, sampling, packaging and pricing. They provide information transfer
about the receiving, storage (inventory levels), transfer, order selection and
picking, cross-docking and shipping of the goods, needed for the better
administration of the warehouse and thus for the efficient management of the
supply chain. Accurate information, regarding customer data, inbound andoutbound shipments and facility space utilization, is needed as well. (Lambert &
Stock 2001, 390-396.)
Warehouses can be categorized according to their location in the supply chain and
the ownership. The warehouses can be situated at the place the raw material is
extracted, at the production plant or at field, where the goods are sorted and
consolidated to be distributed to the retailers. It is also possible that finalcustomers can obtain their goods straight from the warehouse. According to the
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ownership the warehouse types are public, leased or rented and company-owned
(private) warehouses. The type of the warehouse a company should choose for
using has a great influence on the supply chain costs, level of service and
consequently companys profit. (Lambert & Stock 2001, 395.)
Plant warehouse costs are mainly fixed. However, additional costs may occur with
the throughput, amount of product that enters the facility and moves out, and they
are connected with the handling the product but not with the inventory stored.
Public warehouses charge for product handling, inventory turns, and for storage
(based on some time period) as well. Rented or leased warehouses charge for the
amount of space rented. The costs usually do not vary when they are changes inthe inventory level, if it does not require more space. Though, some additional
expenses can occur caused by equipment operating costs and labour and connected
with the throughput fluctuations. The costs of the company owned warehouses are
considered as fixed, because do not rise with the change in the quantity of
inventory, although they might vary with the labour and material handling
operations. The company should take strategic decisions also on the location of
the warehouses and their number. These decisions have impact on thetransportation economies and also set the customer service levels. (Lambert &
Stock 2001, 395.)
Warehouses differ also in size and product mix stored. Factors that affect the size
of the warehouse are closely related to the materials handling equipment used. In
addition to that, other matters that determine the size of the warehouse are the
companys market, the number, size and volume of the goods stored, throughputrate, production lead time, economies of scale, stock layout, aisle requirements,
types of racks and shelves used, and office area in the warehouse facility. The
warehouses can be classified also according to the variety of products stored and
the market it serves. There are warehouses that store only one product or product
type which facilitate the material handling, storage and other warehouse activities.
In order to use the benefits of this type of warehouses a company should trade
with high-turnover items. Other type of warehouse includes warehouses that storefull-line line of products for speciffic market or geographic territory giving the
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customers opportunity to collect the full order from a single warehouse.
2.3 Material handling and packaging
The purpose of material handling management is to maximize the utilization of the
space within the warehouse and accelerate the materials flow, loading and unloading
processes, during the product movement across the supply chain. The managers should
evaluate and decide the use of different material handling systems. They should
calculate the trade-offs between automated, but more expensive, or manual, but not so
efficient, alternatives. (Johnson & Wood & Wardlow & Murphy 1999, 131-148.)
The materials handling systems and equipment are determined according to the
product characteristics -weight, size and material density and viscosity, and the way
they are packed. For example bulk materials (sand, coal, oil and others) are loose
compared to the packed materials and therefore they are handled by pumps, shovel
devices, conveyor belts and excavators. The point is to place the bulk materials into
more convenient form, like containers, in order to facilitate their transportation. Oncethey are put into different containers types, they are examined not as bulk materials
but as container packages, which require totally different devices for material handling
(dock cranes, forklifts) and transportation modes (truck trailers, railcars, ferries).
(Johnson & Wood & Wardlow & Murphy 1999, 131-148.)
The objectives of the material handling is to remove human labour, wherever it is
possible, to decrease travel distances, to minimize products in process and to decreasethe losses from waste, spoilage, breakage and theft. Materials handling generates costs
(labour, time, machinery and their usage) without bringing additional value to the
product, therefore the task of logistics managers is to keep these operations at
minimum level. If material handling is managed poorly, it can lead to production
delays, lost or damaged products and consequently decreased level of customer
satisfaction. On the other hand appropriate materials handling can reduce level of
inventory, lower costs and increase productivity. (Johnson & Wood & Wardlow &Murphy 1999, 159-164.)
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During the handling process the product characteristics or quality can be changed. For
example, gases are usually handled within pipeline systems. But there is an exception,
natural gas is liquefied after cooling and compressing into special tanks in order to
decrease its volume and to enable the overseas transportation. Other examples are rice
grains, which can be broken during transportation phase when they are poured into
tank or containers, this requires special handling and facilities during the loading and
unloading process, so that the grains never drop more than a few 60 centimeters at any
time. (Johnson & Wood & Wardlow & Murphy 1999, 161.)
The role of packing and packaging activities is to organize, identify, protect andpreserve the product while raising interest, providing information about the
product and attracting customers. In other words, the package of the product
performs tasks with logistics (packing) and marketing (packaging) purposes at the
same time. More widely described, the functions of packing are:
- To enable bulk products containment in order to facilitate their distribution.
- To reduce the industrial production to a manageable and convenient for the
consumer size.- To allow primary packages to be unitized into secondary packages, for instance
placed inside a corrugated case, in order to reduce the number of times a product
must be handled.
- To give sufficient information about the requirements of products handling and
to facilitate its identification during distribution.
- The protection of contents does not have for a purpose only to protect the
products from damage but to avoid environmental pollution as well. (Lambert &Stock & Ellram 1998, 328-331.)
This logistics activity is closely linked to warehousing and material management
and transportation activities. Well designed and managed packing process can
improve the warehousing effectiveness and efficiency and raise productivity.
Good package facilitates the material handling process, which on the other hand
can increase the overall service level and decrease the costs. It is obvious thatwhen packing a product the package takes up space and adds weight. For that
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reason special attention should be given to the weight, size and material of the
package, since light packages with appropriate size enable cutting transportation
costs optimizing space utilization of warehouses and transport equipment.
(Lambert & Stock & Ellram 1998, 328-331.)
More attention should be given also for the protectiveness of the packing, which
makes possible to reduce damages and requirements for special material
handlings. When designing the package, the environmental issues should be also
taken into consideration, environmentally conscious package enables savings in
disposal costs and reduce waste of products, and at the same time it can give
favourable image for a company. Minimum and returnable packing containersreduce costs and they are also beneficial for the environment. (Lambert & Stock &
Ellram 1998, 328-331.)
More comprehensively described, the functions of packing are to enable bulk
products containment in order to facilitate their distribution. To reduce the
factories output to a manageable and convenient for the consumer size. Toallow
primary packages to be unitized into secondary packages, placed inside a
corrugated case, in order to reduce the number of times a product must be
handled. (Lambert & Stock & Ellram 1998, 330.)
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2.4 Procurement and order processing
Procurement consists of acquisition of materials and services which have a key
importance on the effectiveness and efficiency of logistics and manufacturingactivities. It forms an important part of the supply chain, since companies are
depending, on some level, on materials, products and services providedby other
companies. Procurement includes versatile activities, such as supplier selection,
price and timing determination, quality control and others. The uncertainty factors,
such as fluctuations of availability and price of the materials, have increased the
importance of procurement in the supply chain. (Dobler & Burt, 2000, 12, 17-26.)
The terms purchasing and procurement do not have the same meaning, even
though they are used many times interchangeably. Purchasing refers only to the
actual buying process, when procurement is much wider concept, it includes not
only the buying process, but also traffic, warehousing and receiving of inbound
materials. The primary objective of procurement is to provide companies with the
materials and services needed in order to keep the efficiency of their operations at
high level. Appropriate and accurately managed procurement process, helps tokeep the inventory and loss at minimum level. Another objective is to obtain the
materials and services needed at lowest price possible and with the quality that
fulfill the companys requirements. One of the most important objectives of the
procurement is to find and development a competent collaboration with the
suppliers. Properly managed procurement can improve companys competitive
position in the market. (Lambert & Stock 2001, 478.)
One of the most important goals of procurement is to find and select the most
appropriate supplier among a huge number of suppliers that can provide a
company with the products or materials they need. Many factors should be
considered before establishing a contract with a supplier. A company should
evaluate how well the supplier can adjust to their requirements, for instance, in
terms of lead time, price and quality. Also the supplier should be evaluated
carefully in terms of its experience, reputation and reliability. (Lambert & Stock2001, 480.)
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Quality control of materials and products is also an important part of the
procurement process. Usually the supplier determines the quality level, but it is
buyers responsibility to secure the quality of supplied materials and products. The
quality should meet the commercial standards and requirements. Sometimes
companies are engaged in forward buying of materials and products. Forward
buying means that materials and products are acquired in advance of the time they
are needed. Usually forward buying is used in two different situations. First, if the
price of the materials or products have to be increased, the company might buy an
exceed quantity of the specific product in order to avoid the increasing price of the
supplies. Secondly, forward buying is also used in the situations when thematerials resources are scarce, such as oil, in order to secure the availability of
materials also in the future. Forward buying presents also some risks, since the
price of materials usually varies in extend, because of competition or
technological developments, company may actually purchase the products at
higher price than necessary. Also forward buying increases inventory carrying
costs, because of holding excess inventory. (Lambert & Stock 2001, 487.)
Just in time purchasing, JIT, has reached a lot of popularity in the recent years.
The basic idea behind the JIT concept is to cut lot sizes, which reduces ordering
and inventory carrying costs. JIT purchasing strategy requires frequently placed
orders and deliveries. In this strategy the number of suppliers used is small and the
agreements are made for a long term. The aim of JIT is to create stable and long
term agreement which ensures the efficient flow of materials. Because of frequent
deliveries, the transportation costs can rise, this is why buyers usually use nearbysuppliers, which enables reducing transportation costs. Another benefit of JIT, is
that product defects are detected fast, due to the frequent deliveries. Of course, the
use of JIT strategy requires that companys demand is predictable and steady.
(Lambert & Stock, 2001, 489-491.)
Order processing includes all the activities that are needed for order fulfillment,
from the point when a company receives an order until the point when the goodsor materials are shipped to the customer. Order cycle refers to the time used in
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order processing. The order cycle, from the sellers point of view, starts from the
time the order is received and ends when the goods are placed in customers
storage. From buyers point of view, the order cycle starts when the order is sent
out and ends when the goods or materials are received. In the case, when the
goods are needed on regular basis, the order cycle is called order replenishment.
Order cycle consist of different stages, including preparation and transmittal of
order, receipt and entry of an order, order processing, order status reporting and
continues through the warehousing picking and packing, transportation and
delivery to customer and unloading of the goods or materials. (Johnson & Wood &
Wardlow & Murphy 1999, 101-104.)
Typically the order process begins when the buyer needs a certain product and
places an order. The manufacturer receives the order and enters it to the order
processing system. At this stage the manufacturer should check if the needed
products are available in the storage and in the case, there are no desired items in
the storage, the manufacturer should determine the time table for production of
these items. Also customer credit situation should be checked at this stage. After
this the invoicing information is given to accounting, acknowledgements of theorder are sent to the customer. After that picking and packing information
regarding the products is given to warehouse as well as the shipping documents.
Hence, the products are taken out of the inventory and timetable for transportation
is determined. After that the invoicing is proceed forward to the customer.
(Lambert & Stock 2001, 148-151.)
In recent times the majority of companies place their orders using electronicinterfaces instead of the traditional way to place orders by phone and fax machines
or even in some cases by post. Electronically placed orders enable faster and more
accuracy transitions and entries of orders, which on the other hand enable to
reduce inventories, without decreasing the level of customer service. Customers
can also benefit from these prompt order entries, in the form of reduced order
cycle times and reduced inventories. (Lambert & Stock 2001, 149.)
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The main purpose of order processing systems is to provide uninterrupted
information flow between manufacturer and customer. When selecting the order
transition system issues concerning time, costs, consistence and accuracy, should
be taken into consideration. In comparison to manually managed order systems,
electronically managed order processes save time and reduce risk of human errors.
(Lambert & Stock 2001, 151.)
2.5 Traffic and transportation
Transport activities are aimed at increasing customer satisfaction by changing thegeographic position of goods or people. In many cases raw materials are
transported from the place of extraction to the place of manufacturing. Later on
these goods are moved to another place where they might be used in the final
product assembly which after that is transported further to the warehouse or
distribution centre from where it is again transported to the retail shops.
Transporting goods is one of the most costly logistics activities in terms of money
and time. Inbound and outbound transportation costs can account for 20-50 % ofthe product price, depending on the product. Effective traffic management can
achieve significant improvements in profitability. For that reason transportation
matters require good understanding, strategic thinking and accurate evaluation. .
(Lambert & Stock 2001, 312-314.)
The transportation process does not halt here but it may continue with the
transportation of the purchased goods to the final customers premises or home.For instance many furniture shops offer as a service delivery to the customers
door. Thus, transportation processes may occur many times connecting each link
of the supply chain until the product is delivered to the right recipients. On the
other side, the transportation has as a task to take care of bringing the customers to
the places where the services are situated. This is the way how the transport
creates the utility of space and contributes to time utility, setting free human and
product resources from places where they have small utility potential to placeswhere their full utility can be realized. (Lambert & Stock 2001, 313.)
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The transportation process should answer the following main questions:
What will be transported- the characteristics of the load- people, livestock or other
consumer goods and commodities. If it is commodities, then what type of
commodities, their size, weight, and volume? The next question is how it will be
transported. The management should consider the modes of transportation that are
available for the transportation of the load and the consolidation of shipments and
how they will affect the transportation costs and delivery time, choosing the most
appropriate alternative. Routing and scheduling are the following issues that
should be decided upon. Route problems that management has to resolve, regard
to infrastructure (roads, bridges, traffic jams, facilities and equipment), political
issues (threat of war, riots or piracy) and customs and environmental matters.(Lambert & Stock 2001, 350.)
Achieving effective traffic and transportation operations is possible only with full
interaction between other links of the supply chain and activities that even can
spread beyond the logistics areas. These activities include accounting (freight
bills), engineering (packaging, transportation equipment, computer technology);
legal (warehouse and carrier negotiations and contracts); manufacturing (just-in-time deliveries); purchasing (expediting, supplier selection); marketing/sales
(customer service standards); receiving (claims, documentation); and warehousing
(equipment supply, scheduling). (Benson & Whitehead 1994, 1-2, 158-163.)
Nowadays, most of the companies outsource their transportation duties, using
third parties services that specialize especially in this line of business. Many
logicians claim that it is cheaper and more effective to give this part of thedistribution process into to the hands of transportation companies that have more
experience than holding own transportation fleet. For that reason, the good
relationship and sufficient communication with the carrier can be of substantial
matter for the successfully management of the transportation process.
Sometimes the material flow has to pass across additional links in the supply
chain, where big consignments are unloaded, sorted and consolidated. These linksare called terminals. The terminal is a place where traffic and goods can interchange
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vehicles or mode of transportation continuing their way to the aimed destination. The
functions of the terminal are to allow access to vehicles which operate on a specialized
way. Another task of the terminal is to make possible easy interchange between vehicles,
sometimes of different modes of transportation operating on the same way, and to assist
the consolidation of traffic. At some terminals, goods will arrive in mixed loads for
sorting, before individual consignments are consolidated with others bound for
common destinations. (Benson & Whitehead 1994, 45-49.)
The size of the terminals varies, depending on their location and purpose, from a
simple roadside bus stop facility to a huge complex of buildings grouped together
for convenience, efficiency and economy. Terminal equipment may be differentaccording to the different forms of transport, product characteristics and the
volume of traffic. The goods need suitable mechanical handling equipment to
make the loading and the unloading, sorting and stacking processes easier. The
design and layout of the terminal also should be carefully considered in order to
avoid congestions or over-stowing and at the same time to ensure better
expedition and efficiency of the operations. (Benson & Whitehead 1994, 45-49.)
2.6 Demand forecasting
Demand forecasting serves as a basis for management strategic and planning
decisions with regard to supply chain. Demand forecasting is of high importance
for companies that perform pull or push strategies. Companies that use push
strategy, produce materials or products in anticipation, before receiving customerrequest, whereas for companies of pull view the production is based on the real
customer demand. For pull strategy, demand forecasting is needed to determine
the availability of production capacity and inventory. In push strategy the demand
should be forecasted in order to define the production quantities. (Chopra &
Meindl 2004, 171-178.)
The demand forecasting is needed to ensure the efficiency and profitability ofcompanys future operations. So, the purpose is to forecast the demand in the long
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term in order to plan in advance companys activities concerning material
acquisitions or production quantities, production capacity and level of inventories
and resources (labour, transport) needed. Demand forecasting of mature products,
that has stable demand, such as milk, is easier to forecast than the demand of the
goods with variable demand, such as fashion and high-tech goods. Forecasting the
demand of variable demand goods is of high importance, due to the fact that their
life cycle is relatively short. There is always a high risk that too small or too big
quantities are produced. (Pouri 1997, 87-89.) ( Chopra & Meindl 2004, 171-178.)
There are many forecasting methods available, but it should be remembered that
they are always wrong to some extent. Future developments are always difficult toforecast due to the fact that there are many unpredictable factors of uncertainty in
the market that have influence on the demand, such as economic and price
fluctuations, new competitors and new product developments. When forecasting
the demand, it should be remembered that short term forecasting is usually more
accurate and gives opportunity to respond faster to changes in the environment
and other conditions, than long term demand forecasting (Pouri 1997, 87-89.) (
Chopra & Meindl 2004, 171-178.)
The forecasting methods roughly can be categorized into four different groups:
qualitative, time series, causal and stimulation methods. The qualitative method is
used when there is very little historical information about demand available. So
called qualitative methods, such as judgments, surveys, intuition or benchmarking
are used to forecast the future demand. This method can be used when forecasting
the demand of a new product or new technologies. Time series forecasting isbased on historical demand information. The basic idea of this method is that the
demand history is reliable indicator of future demand. This method should be used
for products with stable demand that are not subject to trends or seasonal demand
variations. The time series forecasting method is reliable for time periods of less
than six months. ( Chopra & Meindl, 2004, 174-179.) (Ballou 1999, 277-281.)
The causal forecasting method is based on the idea that demand forecasting isrelated to another factor, for example an environmental factor such as interest
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rates and other economic conditions. Customer service level or pricing are
examples of demand related factors. For instance, the customer service can
increase the sales and if the customer service level is known the future sales can
be forecasted. This forecasting method may be problematic to use since finding
the right causal variable is not so easy. Another forecasting method is stimulation,
which is a combination of time series and causal forecasting methods.
Stimulation, predict the customer behavior, based on historical data and the aim is
to predict how customer reacts on certain changing factors. For instance, if there is
price promotion, the aim of stimulation method is to forecast how customers
behaviour and demand will change. Many airline companies use this method, for
instance if certain flights of low fair airlines are full-booked, other airlinecompanies may raise the flight ticket for the particular flight. ( Chopra & Meindl,
2004, 174-179) (Ballou 1999, 281.)
The demand forecasting has impact on marketing, production, finance and
personnel. The demand foresting helps to determine marketing strategies on
promotion, sales force efforts, pricing and marketing research. In addition to that
forecasting the demand enables to decide in advance the production timetables,material acquisition and purchasing strategies and inventory levels. ( Chopra &
Meindl 2004, 174-179.)
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2.7 Facility site selection
By facility site selection we mean the location of plant, warehouses, terminals and
stores. Location decisions are a crucial part of the supply chain strategy and
influence the level of customer satisfaction to a great extent. Deciding where a
company will locate its facilities constitutes a large part of the design of a supply
chain. The basic issue for the company here is how to make the desired trade-offs
or in other words whether to centralize the locations of warehouses, plants or
terminals in order economies of scale or decentralize them in order to become
more responsive by being closer to the customer. Companies must also consider a
host of issues related to the various characteristics of the local area in which thefacility may be situated. These include macro-economic factors, quality of
workers, cost of workers, cost of facility, availability of infrastructure, proximity
to customers and the rest of the network, tax effects, and other strategic factors.
(Ballou 1999, 437-439.)
Companies must also decide upon the facility's capacity which is related to its
intended performance. A large amount of excess capacity allows the facility to bevery flexible and to respond to wide fluctuations in the demands placed on it.
Excess capacity, however, costs money and therefore can decrease efficiency. A
facility with little excess capacity will likely be more efficient per unit of product
it produces than one with a lot of unused capacity. The high utilization facility
will, however, have difficulty responding to demand fluctuations. Therefore, a
company must make a trade-off to determine the right amount of capacity to have
at each of its facilities. (Ballou 1999, 437-439.)
The geographic placement of the stocking points and their sourcing points create
an outline for the logistics plan. Fixing the number, location, and size of the
facilities and assigning market demand to them determines the paths through
which products are directed to the marketplace. The proper scope for the facility
location problem is to include all product movements and associated costs as they
take place from plant, vendor, or port location through the intermediate stockingpoints and on to customer locations. (Ballou 1999, 439.)
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2.8. Salvage and scrap disposal and return goods handling
In every production process there is a certain number of by-products that cannot
be used for production of any other product, so they become waste products that
must be disposed. The efficient handling and transportation of waste products or
materials, have impact on the overall performance of the supply chain. The waste
products must be transported to adequate places or if they are recyclable they can
be remanufactured. (Lambert & Stock 2001, 25, 281.)
The aim of the materials disposal is to categorize by-products that can be reused
and by-products that are hazardous and must be disposed. Earlier the materialsdisposal was not considered as important part of logistics activities, but as the
general awareness of environmental issues have increased and governments have
tightened their regulations concerning the environment, the importance of
materials disposal have increased significantly. A lot of by-products can be reused
or sold to other companies or manufacturers. (Lambert & Stock 2001, 25.)
The return goods handling is often called reverse logistics, since the return goodsgo in the opposite direction in the supply chain, from consumer to the
manufacturer. Goods are returned to the manufacturer for several reasons, for
instance if the product presents some defect or it is spoiled, or in case of wrong
delivery (wrong address or wrong product). (Lambert & Stock 2001, 25, 231.)
The reverse logistics costs are usually much higher than the costs of normal
material flow. The costs of reverse logistics can be even nine times highercompared to the costs incurred in the supplying the goods to the store. In many
industries the costs increase because of customers return goods for warranty repair
or they want replace their goods or recycle them. Another reason for higher costs
is the fact that most of the companies have not developed efficient return goods
channels, for instance they may lack suitable handling equipments. Also the
transportation, storage or handling of return goods may not be so flawless, which
on the other hand requires more financial and labour resources and increases costs.For these reasons the development of reverse logistics channels have became more
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and more important for companies, from financial and operational perspectives.
(Lambert & Stock 2001, 231.
2.9 Distribution communications and parts and service support
Communication has a central role for the supply chain management. In order to
operate efficiently companies should develop an accurate communication system
that provides sufficient information flow between each party involved in the
supply chain. That means that companies, their suppliers and customers should
keep in touch without any interruption during all the processes in the supply chain.The aim of the communication system is not only to link together the participants
in the value chain but also to assure the required information flow between and
within the supply chain activities (warehousing, transport, inventory, customer
service and others) and companys departments, such as marketing, logistics,
production and accounting. Companies can build their communication network
using computerized managed information systems (MIS) or just as simple as
word-of mouth information distribution methods between parties involved.(Lambert & Stock 2001, 21-22.)
Manually managed information systems are very slow and there is a high risk of
potential errors. The manually managed information systems do not serve very
well the integration of logistics activities, because it takes a lot of time and there
are frequent information delays and inconsistency. Possible errors occur especially
in pricing and determination of available inventory, as a consequence of these,errors can occur in invoicing causing order and payments delays. Inadequate
communication systems make obstruct the efficient management of the whole
supply chain. (Lambert & Stock 2001, 22.)
On the other hand computerized information systems provide accurate, clear, fast,
and convenient information flow between different parties among the supply
chain. Efficient information systems provides the managers with the rightinformation at the right time that enables them to make more appropriate strategic
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decisions concerning selection of transportation modes and providers, plant and
warehouse site selection, establishing an efficient customer service level and
selecting suitable order processing system. The management also can benefit from
up-to-date electronic systems by obtaining and analyzing information about the
companys status, performance and future development planning. (Lambert &
Stock 2001, 21-22, 152-154.)
Supply chain activities do not end when the goods are delivered to the customers.
The customers are provided with after-sale services in the form of part and service
support. The purpose of the part and service support is to provide customer with
spare parts and reparation services in the case of product breakage or malfunction.The challenge of part and service supports is to provide their customers with the
spare parts and reparation services when and where needed. (Lambert & Stock
2001, 23.)
2.10 Customer service and satisfaction the output of logistics activities
Every company does business in order to serve customers and make profit.
Customer service is the final objective, the output of the logistics and therefore it
is situated on the top of the logistics chain of activities. For logistics, the customer
is any delivery destination. That means that customers might be ordinary
consumers, wholesalers or just a companies manufacturing plants and
warehouses, which appear to be customers of their suppliers The level or
standards of customer service a company offers, determines how many of theexisting customers will remain customers and also how many potential customers
will become actual customers. (Ballou 1999, 80-81.)
The profit margin is just a reflection of the level of customer service provided and
also how successfully a company has implemented the services across the supply
chain. For that reason every single element in the logistics systems has a
significant role in the forming of the customer service level and customersatisfaction, which are set up by the circumstances whether a company can deliver
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the right product, at the right costs, at the right place and time and in the right
condition. Customer service can be defined in three ways- as an activity that has to
be managed, e.g. order processing, invoicing, product returns handling; as
performance measures ( how fast a company can handle a particular number of
orders); or just as an element in the company philosophy. (Rosenbloom 1999, 409-
411.)
For instance, well planned order processing enables a decrease in order cycle
times and total logistics costs. When ordering, information about inventory status,
expected shipping, delivery days and back-order status are extremely useful for the
customers. With regard to transportation, the main service characteristics that haveinfluence on the customer service level are consistency of service and time-in-
transit, market coverage, flexibility, loss and damage performance and the ability
to provide more complex services. If some product is not available at the exact
time and place when it is needed it can lead to loss of sales, customer
dissatisfaction and production downtime.If the customer is dissatisfied from the
slow delivery or the damaged product his first reaction will be to stop buying the
companys product. The reliability of the company can decrease sometimeswithout its fault. For that reason, to find a suitable deliverer partner can be a
matter of vital importance for the business. ( Stock & Lambert 2001, 146.)
When stockouts occur the customer can be kept by arranging product substitutes.
If it is not possible, the other alternative to maintaining customer goodwill is
expediting the shipment when the product is received in stock. In this case there
will be additional costs because, for instance, the mode of transportation has to bechanged but on the other hand customer satisfaction will be maintained. In case of
too often stockouts situations and failing to provide substitute products or fast
supply and delivery to the final destination, the company will face loss of market
share and profits as a result of the decrease of the customer service level.
( Stock & Lambert 2001, 228-232.)
The warehouses are necessary to maintain a source of supply and to support thecompanys customer service policies as well. For example, at time of unexpected
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demand, excess inventory can help the company to manage the desired level of
customer service by providing quick delivery to the customers and thus avoiding
stockouts situations. If the company wants to provide a 24-hour delivery standard
to satisfy customer needs then it will require a number of field warehouses. The
more warehouses around the country, the faster delivery time is achieved. ( Stock
& Lambert 2001, 391.)
The location and the transportation links to the warehouse are also issues of great
importance. Some of the big retail stores have a warehouse within their own
facilities. They store products which are taking too much space and cannot be
exposed all. However these kinds of products might have a fast turnover cycle. Ifthere was no any storage space within or very near the store it could lead to
unrealized sales and lost customers. Most of the warehouses are accessible only by
road transportation. Depending on the product they store, some warehouses can be
situated at the airports or harbors with railway and motorway accessibility at the
same time. Some products are seldom transported by air, for example cars, but if
the customer pays and wants the delivery urgently then a warehouse situated near
an airport will have an advantage in increasing the customer service level. ( Stock& Lambert 2001, 409-410.)
Procurement or purchasing in the narrower meaning has an essential role in
building good customer service. It also has a great impact on the formation of the
product price. Therefore it is very important to make the right selection of
suppliers, supply source locations, timetables of purchasing, quantity and price
determination and to execute quality control during the procurement activity. Theprocurement management should provide the best possible flow of materials at the
most appropriate price in order to enable continuous product availability to the
customers. Some other objectives of purchasing activity are to keep the inventory
investment and loss at minimum ( Just-in-Time purchasing has enabled to fulfill
that requirement), provide adequate quality standards, and to find from where the
items can be purchased and delivered at the lowest price. In order to build a good
customer service level, the company should plan well the process ofpurchasing/production. The company should try to achieve lowest possible
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3. GROCERY INDUSTRY IN FINLAND
3.1Grocery retail market in Finland
Grocery retail business covers all purchases that happen on a frequent basis and
includes goods needed in everyday life- groceries, cleaning and hygienic products.
There are new trends in the Finnish grocery industry which bring significant
changes in the retail market. Finnish grocery retail business is focused on
cooperation with international retail companies, which enables to increase the
volume of purchases and consequently gives them possibility to negotiate better
conditions and lower prices. This gives a competitive advantage to the Finnishsuppliers and wholesalers. For example, every Finnish wholesaler, Inex Oy, Kesko
Oyj and Tuko Logistics, has Europeans grocery retail chains as partners when
making their procurements from the manufacturers. (Pastinen & Mntynen &
Koskinen 2003, 26.)
In Finland the retail market is very centralized. The three biggest retail companies
(SOK, Kesko Oyj and Tradeka) comprise 80 % of the whole grocery retail sales inFinland. For comparison, only Sweden, Denmark and Norway have more
centralized retail sales. On the other side are countries like Holland, Germany and
Spain where the market share of the three biggest retail companies accounts for
less than 60 %. (Finne & Kokkonen 2005, 19-27, 48-53.)
The integration of HOK (Helsingin Osuuskauppa) S-Groups cooperative
enterprise, and Elanto was one of the most significant arrangements in the groceryretail business during the last years. It helped S-Group to raise their market share
considerably in the capital area. Elantos stores were quickly linked as a part of S-
Group stores chain and the hypermarket brand of Elanto, Maxi, was taken out of
use. In that way S-Group has managed to acquire plots with good locations which
have turned to be very successful tactic to attract more customers. Regional
community activities are also strengths of the cooperative enterprises. (Finne &
Kokkonen 2005, 25.)
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Another interesting company arrangement in retail market was the consolidation
of Tradeka and Wihuri. After the integration, Wihuris chains, Sesto, Etujtti and
Ruokavarasto, disappeared from the market and their stores were converted into
Siwa, Valintatalo and Euromarket. At the same time new adjustments took place
in the Finnish wholesalers organizations. Inex Partners Oy, which used to be
owned by S-Group and Tradeka, was entirely acquired by S-Group, and Tuko
Logistics became Tradekas supplier. This transformation of logistics channels is a
great challenge for both parties since their volumes of goods accounted for
approximately 10 % of Finnish grocery retail market. As a result of this new
reorganization Inex own brands were taken out from Tradekas product range and
Tuko logistics brand as Eldorado and First Price came instead. (Finne &Kokkonen 2005, 25-26.)
Price competition in Finland has tightened remarkably in the last years and the
main reason for that has been the appearance of the discount chain, Lidl, which
brought up a new trend in the grocery retail market. As a response to that Kesko
has launched its own discount store chain, Cassa, without significant success until
now. Also S-Group has introduced its own pricing strategy regarding S-Marketretail chain outlets. This price strategy is based on everyday low pricing, EDLP-
model, which means that instead of special offers or product discounts, the price
level is kept on steadily low level. The customers can rely on the fact that the
prices are always the same and it is not worthy to visit many different shops in
order to find the best offer. (Finne & Kokkonen 2005, 30-31, 119.)
The Finnish grocery retail companies have not been a passive player in theinternationalization process. It is understandable that in the Finnish retail market,
the companies cannot reach significant sales volumes due to the fact that there are
only 5 million potential customers, the whole population of Finland. For instance,
this is only the population of St. Petersburg in Russia. Therefore Finnish grocery
retailers are planning or have already expanded their activities abroad, mainly to
Baltic countries and Russia, where there are good prerequisites for market growth
and development. S-group has built four Prisma-stores in Tallinn, Tradeka has
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opened three Siwa outlets in St. Petersburg and Kesko Oy has numerous outlets in
Estonia and Latvia under the Rimi-brand. (Finne & Kokkonen 2005, 33-37.)
The emergence of shops private labels came as an answer to the tightening price
competition in the Finnish market. The share of own labels among stores product
range is growing constantly. Examples of private labels in Finnish grocery
industry are Keskos Pirkka, Euroshopper, Costa Rica and Rico; Inexs Daily,
Rainbow, X-tra and Pouta and Tuko Logistics Eldorado and First Price. In 2004,
the market share of private labels accounted for 10% of the whole grocery market
in Finland. The share of private labels has grown relatively quickly in Finland in
the last years, but the share is still quite small in comparison to other countries, forexample in Switzerland the share of private labels account for 40 % of the whole
grocery market. Also the market share of private labels varies a lot from one
product to another, for example among hygienic products the share of own labels
is significant, over 80 %, whereas among some grocery products the private labels
account only for few presents of the whole sales of the product range. (Finne &
Kokkonen 2005, 47.)
The main reason for the expansion of private labels is the aim to increase the
number of loyal customers and distinguish its own product range from the
competitors. This is also a way how the stores can strengthen their market position
and attract more customers. On the other hand own labels strengthen stores
negotiation power in the value chain. Store chains are responsible for forming
their product ranges and setting the prices for their products and they can also
determine the visibility of the products and strore layout. The marketing costs ofprivate labels are very low or there are no marketing costs at all, which enables the
stores to sell them at lower price. According to the research of AC Nielsen (2003),
the prices of private labels in Finnish grocery stores are approximately 34 % lower
than the prices of mega brands. (Finne & Kokkonen 2005, 48-50.)
In order to succeed in the retail market, the stores should take into consideration
the changes in their customer base and consumer behavior. The customer needsmay vary to some extent from time to time, creating new trends, which have an
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influence on the behavior of the customers. Nowadays the family life is very
different in Finland than few decades ago. As both parents work, they have very
little time to spend on shopping and cooking. In addition to that it should be
mentioned that peoples cooking skills have abated and families eat very seldom
together. Therefore popularity of convenience or so called tertiary processed food
has grown remarkably in Finland. As the convenience food requires minimum
preparation, usually just heating, it fits perfectly the requirements of the
contemporary busy life style. The market share of this kind of food has been
growing with faster temps compared to the market of grocery products. (Finne &
Kokkonen 2005, 53.)
There are also some changes in the consumers shopping behavior, for example
people go shopping more seldom, little bit less than four times a week per
household. For comparison just six or seven years ago Finns were shopping in
average 4,6 times per week ( Pastinen & Mntynen & Koskinen 2003, 125). At the
same time the average amount of money spent on groceries daily, has increased
remarkable, being now 17 euros. These new patterns in the change of consumers
behavior can be explained with the continuously increasing number ofhypermarkets and shopping centers, where people are buying bigger amounts of
products at once. (Finne & Kokkonen 2005, 55-56.)
It is typical that the actual shopping in the store facility takes less than half of the
time of the whole shopping trip. And also the longer the distance to the shop is,
the more money on purchases is spent. More than half of the consumers go
shopping by car. Avarage amount of money spent on grocery products accountsfor 1800 euros per consumer per year and the weight of grocery products (food,
beverages and non-food products) is 936 kg averagely. ( Pastinen & Mntynen &
Koskinen 2003, 125-126)
More and more priority is given to product safety and safety measures have been
carried out more consciously and carefully. The bird flu and mad cow disease had
negative impact on the grocery industry and were reason for the decline of someproducts in the grocery and food market. Therefore, the Finnish suppliers have put
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an accent on the safety measures of the value chain of grocery products and have
undertaken considerable supervision on the products movement, from the
manufacturing to the time they reach the customers. (Finne & Kokkonen 2005,
51.)
Another typical feature of the Finnish market is the increasing number of products
that have special benefits or at least the harmful substances are reduced to a
minimum. Nowadays people are more aware what they eat and drink and at the
same time different food allergies have increased. The grocery industry have taken
these factors into account and now can be seen more and more products with
decreased contents of fats and cholesterol or without glutens. (Finne & Kokkonen2005, 51-53.)
The origin of the products also has a significant importance in the success and
popularity among the customers and determines the consumer attitude towards
some specific food products. Finnish people look with suspiciousness especially to
foreign milk and meat products. They rely more on the quality of the domestic
products and in many cases they are ready to pay a higher price for them. Forexample, even five years after Lid came on the Finnish market there is s